How to Beat Bonds Using Social Security

Knowing when to take Social Security can be a real chore.  We frequently work with clients to determine the optimal time to take the benefits.  There are different ways to calculate the benefits of waiting, and this recent WSJournal article equates the return to a bond investment, with a surprisingly high payoff.

Consider an unmarried man in average health, age 62—the youngest age for starting retirement benefits. His payoff for waiting until age 67 to collect is the equivalent of buying a long-term bond that pays 3.2% a year. For a woman, all else held equal, it’s a 4% yearly return, according to Mr. Shoven and his research partner, Sita Slavov at Occidental College.

Here’s the whopper: For married couples, if the higher-earning spouse delays payments from age 62 to 70, but at age 66 begins collecting spousal benefits from the lower-earner’s plan (as Social Security allows), the return is like owning a 7% bond.

Not just any bond, either. The fictional alternative would have to be government-guaranteed and provide periodic inflation adjustments. And the income would have to be tax-free for most recipients.

The closest real-world investments are Treasury inflation-protected securities, or TIPS. They’re government-backed and inflation-adjusted, but they’re subject to federal (but not state and local) tax. Ten-year TIPS on Thursday paid minus-0.21%. That’s not a misprint; bond rates are so low that investors are paying to own TIPS just to get the inflation adjustment.

Put differently, a 7% annual return for delaying Social Security payments is for many investors better than a bank certificate of deposit that pays more than 10%, considering the inflation adjustment and tax advantages.

But beware- making any long term plans based on politics is bound to disappoint.

Some retirees find advice on when to start Social Security benefits confusing. That’s because even a ballpark calculation must consider not only factors like gender, marital status, income and health, but also long-term changes to life expectancies and short-term changes to interest rates.

For now, the deal remains sweet. The plan’s trustees say there is enough cash to pay full benefits through 2036 and three-quarters of benefits thereafter, and Mr. Goss says such deadlines historically have served as a call to action for Congress.

Members of both parties are considering legislation to rein in costs. “We clearly have to make changes to things like the retirement age to keep the program affordable,” says Sen. Tom Coburn (R., Okla.), the ranking member of the Finance Subcommittee on Social Security, Pensions and Family Policy.

If you’re making plans based on maximizing Social Security, be sure you have a fallback or contingency scenario in case benefits change during your waiting period.

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